ROE: drag net income
Drag the bar to set net income. Book equity is held still, so the headline ROE moves only because the profit after interest does. Raise the profit and the rate rises. Cut the equity instead, on a different page, and the same profit prints a higher ROE with no operating improvement.
ROE
15.0%
Net income
$15,000,000
The book claim is a fixed $100,000,000. A thinner equity slice would raise the same profit's ROE without the operations improving. Illustrative arithmetic, not a rating or advice.
Book equity
$100,000,000, held still so only the profit moves the rate.
In short
- Drag the bar up for more net income and a higher ROE.
- Read the rate as percentage points: 15, not 0.15.
- Watch the equity line stay put. Only the numerator is moving.
- Focus the handle and use the arrow keys to step profit.
A return on the residual claim
Net income is what is left after interest. Book equity is the residual claim on the balance sheet. Divide one by the other. How ROE works is that division, with the ROE calculator under the answer.
ROIC divides NOPAT by invested capital instead. NOPAT is before interest. Invested capital includes the debt. ROE puts the financing in both the numerator and the denominator.
A recapitalisation can lift the rate
Keep net income and cut equity, and ROE rises. Profit did not rise. The book claim it is measured against shrank. Compare it with ROIC on the same year before calling the rise an operating improvement. ROE against ROIC is that pair.
Return on equity is the one-sentence version of this ratio.
Book equity of zero stops it
A zero or negative book claim makes the ratio unusable, the way negative earnings make P/E unusable. This picture keeps equity positive and large. Coverage of the coupon that sits above net income is a different ratio, on the interest coverage explorer.
Common questions
Is a higher ROE a better firm?
Not by itself. The same profit on a thinner equity slice prints a higher rate. Check ROIC before treating the rise as an operating improvement.
Why is this not ROIC?
Because net income is after interest and the denominator is equity only. ROIC tries to take the financing out of both sides.
Is 15 percent a target?
No. It is net income over book equity on the teaching sheet. It is educational material, not advice.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.